THE SUNDAY CONVERSATION

'Big Short' author Michael Lewis on the money meltdown

With "The Big Short" at No. 1 on the L.A. Times bestseller list and two No. 1 books on the New York Times' lists -- his tale of Wall Street's recent meltdown and "The Blind Side" -- Michael Lewis is certainly surfing the zeitgeist these days. In "The Big Short," he follows a tiny handful of savvy investors who saw the subprime mortgage crisis coming and placed bets on the coming collapse. As their detective work unfolds, Berkeley-based Lewis, 49, reveals how that market worked: Investment firms packaged high-risk loans into securities and persuaded the ratings agencies to give them a low-risk Triple A rating. The result: Lewis' investors saw through the sham and made fortunes on their crafty bets against a market so complicated and obscure that even Wall Street CEOs didn't understand it.

Everybody's mad at Wall Street, and now we know why.

The whole thing is shocking, from beginning to end. When you sit down and talk to these people on the right side of the bet, they can't understand why the entire society isn't marching on Washington with pitchforks demanding radical change.

Why do you think that is?

Because people haven't made it understandable, and people are very easily buffaloed on the subject of money. When you get a Wall Street person in the room with you, he will very quickly make you feel stupid because you don't know what this is or what that is and you'll feel shut out of the conversation. It seems a daunting subject, and in fact the approach of the policymakers has been more or less to say to the people it's too complicated for you to understand. I find that impulse distressing.

How did you decide to look at the crisis through the lens of the few people who bet against the subprime mortgage industry?

Literary necessity. When I wrote "Liars' Poker," I assumed I was done with Wall Street. It's impossible to write about unless you're on the inside because nobody will talk to you. These people were my ticket inside, and they were willing to talk to me because they were essentially flattered by the story being told.

Then I realized that not only could I get inside their lives but they were a wedge to get inside the whole system because everybody on Wall Street knew I was talking to them and they were terrified of what I was learning from them, so they would talk to me too on background. Then I thought that this was a story, if you want it in the simplest terms, of a giant bet gone wrong. And the vast majority of the financial system is on the wrong side of the giant bet and these people were on the other side. So I realized that through these people I could explain what had happened.

Which was what?

In the simplest terms, a machine got built to enrich people for taking really stupid financial risks. The way it worked was it disguised the risks in a number of ways, but complexity was a chief tool. It made it too complicated for people in the end to understand the risks they were taking. And the machine ended up being fooled by its own deceit. And these people weren't fooled. The hardest thing I had in writing it was where to put the complicated stuff so it didn't stop the reader at the wrong place.

I think that by the time you wrote about it, people wanted to know.

That may be. I'm awed by the response to this book. The demand for the book is three times what any other book I've ever written has experienced. I would typically go to a bookstore and there would be 40 or 50 people there. I'm now going to bookstores and there are 500 people there. And they're politically agitated. This is a live wire in American politics right now. The danger of course is that if it's just anger it can express itself stupidly. It's got to be channeled, but that energy leads to change.

Some pundits are saying that if nothing changes, there will be another crisis.

Oh, there will be. The financial world feels like it's built on sand right now. The rules are as screwed up as they were; they're the same rules that led to the mess. And so you can't trust it.

Why do you think reform hasn't happened yet and when might things change?

Democracy moves slowly. The crash of '29 happened and it was four years before there was a financial reform bill. Glass-Steagall wasn't until 1933, and it took a lot of pain and a lot of anger.

But there's another thing that I'm sure is in the backs of the minds of people who would push financial reform from the White House, that they have a policy that they adopted from the Bush administration of essentially giving money to the banks until they're solvent again. The only way the financial system functions in their view is for these big firms to get back on their feet. So if you've got this other thing you want to do called financial reform, you might want to wait a little for them to get back on their feet before you start attacking their sources of revenue. Good financial reform is going to make all these firms less profitable, so they're going to fight it.

And they're much more powerful than they were in the '30s.

And they're much more powerful than they were 18 months ago. I think [Treasury Secretary] Timothy Geithner does think there need to be serious changes, but I think he took a risk, because in saving all these people, he made them strong enough to fight another day.